The correct option is
D They act as insulation against cold.
Normal sentences in active voice begin with the subject, followed by the verb. Among the given jumbled words, there are two nouns/pronouns, which can act as a subject viz. 'they' and 'insulation'. The verb is 'act', which is usually followed by the preposition 'as'. Hence, the two words are used together as a phrasal verb, 'act as'.
In option A, the sentence starts with 'Insulation' but there is no verb which immediately follows. Hence, the given sequence does not form a meaningful sentence. This option is incorrect.
Option B starts with the pronoun 'they' which acts as the subject, followed by the phrasal verb, 'act as'. What do they act as? This question is answered by the noun, 'insulation', which means 'a cover which protects against heat/ cold/ electricity'. Hence, the given sequence, 'They act as insulation against cold' makes a meaningful sentence. Option B is the correct answer.
Options C and D are incorrect as a sentence does not usually start with a verb.